Interactive Brokers and Charles Schwab & Co. Inc. are vowing to go to court to fight a Finra arbitration decision that ordered them to pay $4.6 million over high-frequency trading gone awry.
More than two dozen customers filed a claim against Interactive Brokers and Schwab in November 2019 asserting breach of contract and unsuitability, among other violations, related to “an alleged high-frequency trading strategy in unspecified securities within claimants’ retirement accounts,” according to the March 26 award document.
The three-person Financial Industry Regulatory Authority Inc. panel split, 2-1, in finding the firms liable. Interactive Brokers, whose ticker symbol is IBKR, was ordered to pay $2.7 million in compensatory damages and $984,356 in attorney fees plus interest, while Schwab must pay $606,807 in compensatory damages and $328,118 in attorneys fees plus interest.
But both firms assert that they're not responsible for the financial adviser who did the trading and both have raised concerns that one of the arbitrators who heard the case was biased against them. The adviser was not named in the award document.
“IBKR was not involved in the trading decisions that led to the clients’ losses and is not affiliated with the [Securities and Exchange Commission]-registered independent financial adviser that directed the clients’ trading,” Yani Pena, a spokesperson for Interactive Brokers, said in a statement. “IBKR has significant concerns about the award and the process through which it was reached. We intend to challenge this award in the appropriate court.”
A Schwab spokesperson expressed empathy for the investors but took a similarly defiant stance about the arbitration decision.
“All of the conduct that the clients allege – and all of their losses – occurred after Schwab terminated the adviser in August 2018 and after we notified the adviser’s clients that we were terminating the advisor from Schwab’s platform,” Pete Greenley, a Schwab spokesperson, said in a statement. “We do not believe that the arbitral panel properly considered this evidence or the bias of one of its members. We believe in our high risk-management standards and we intend to challenge this award in court.”
An attorney representing many of the claimants countered that the arbitration panel found that Interactive Brokers and Schwab did not notify their customers about red flags the companies had detected in their retirement and investment accounts.
“Their failure to warn our clients exposed them to catastrophic losses, and the panel appropriately held Schwab and Interactive Brokers liable for a significant portion of the losses,” Greg Hollon, managing member at McNaul Ebel Nawrot & Helgren, said in a statement. “At its core, this case is about a customer’s right to be informed of important information regarding their accounts, and the consequences for firms like Schwab and Interactive Brokers who fail to disclose such information.”
The case could be a harbinger for more arbitration claims against discount brokerages, said Andrew Stoltmann, a Chicago securities attorney.
“They simply have not invested in the infrastructure to support their platforms and they haven’t invested in supervision and compliance,” Stoltmann said.
The evidentiary hearing in the case was conducted by videoconference, according to the award document. Finra suspended in-person arbitration hearings when the coronavirus pandemic broke out more than a year ago and will not resume them until at least June. Parties in an arbitration case can agree to conduct the proceeding via Zoom.
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